Gold isn't behaving like gold

As many of you know, I was in San Francisco the week before last where I had been invited to speak at the MoneyShow, one of the biggest, most preeminent investor conferences in the world.

Over the past couple of decades, I’ve spoken at many MoneyShows all around the country and have covered many different topics. Gold investing is one that often draws a big crowd. Not this year. Guess which natural resource stole the show?

The commodity that attracted attendees’ attention is one that until pretty recently could only be grown and harvested under the shroud of secrecy. Marijuana. Currently legal in 23 states and the District of Columbia, medical marijuana generated $2.7 billion in 2014 and is expected to bring in $3.4 billion this year. Investors are taking notice.

The cash crop is even starting to change intranational migration. Whereas many retired seniors flock to warmer climates in which to live out their golden years, others now factor in whether a state will permit them to self-medicate in order to treat their arthritis, according to a recent Time article.

Investors themselves who might have suffered from arthritis attended the pot presentation at their own risk, as it was standing room only. They couldn’t have been pulled away even to sit comfortably in the scarcely occupied room next door. Sentiment toward gold was indeed very bearish at the MoneyShow, as it is around the world right now.

Gold Hits the Reset Button

Gold is universally recognized as a safe-haven investment, a go-to asset class when others look uncertain. Following the 2008 financial crisis, for instance, the metal’s price surged, eventually topping out at $1,900 per ounce in August 2011.

But last week proved to be a particularly rocky one for the metal, even with Greece and Puerto Rico’s debt dilemmas, not to mention the recent Shanghai stock market decline, fresh in investors’ minds. Gold traded down for 10 straight sessions to end the week at $1,099 per ounce, its lowest point in more than five years. Commodities in general dropped to a 13-year low.

Gold stocks, as expressed by the XAU, also tumbled.

The selloff was given a huge push when China, for the first time in six years, revealed the amount of gold its central bank holds. Although the number jumped nearly 60% since 2009 to 1,658 tonnes, markets were underwhelmed, as they had expected to see double the amount.

Then in the early hours last Monday, gold experienced a “mini flash-crash” after five tonnes appeared on the Asian market. Initially this might not sound like a lot, but five tonnes equates to 176,370 ounces, or about $2.7 billion. It also represents about a fifth of a normal day’s trading volume. Suffice it to say, price discovery was effectively disrupted. In a matter of seconds, gold fell 4% before bouncing back somewhat.

Reflecting on the trading session, widely-respected market analyst Keith Fitz-Gerald noted: “Far from being a one-day crash, this could represent one of the best gold-buying opportunities of the year.”

The last time the metal descended this quickly was 18 months ago, on January 6, 2014, when someone brought a massive gold sell order on the market before retracting it in a high-frequency trading tactic called “quote stuffing.” Last month I shared with you that we now know who might have been responsible for the action—and many others that preceded it—and pointed out that the accused party’s penalty of $200,000 was grossly inadequate. Last Monday I told Daniela Cambone during the Gold Game Film that such downward price manipulation seems to result in little more than a slap on the wrist. But if manipulation is done on the upside, traders could get into serious trouble.

Besides apparent price manipulation, other factors are affecting gold’s behavior right now, three in particular.

About the Author

Frank Holmes is CEO and chief investment officer of US Global Investors. This first appeared in hisFrank Talkblog. For more updates on global investing from Frank and the rest of the U.S. Global Investors team, follow on Twitter at www.twitter.com/USFunds or like on Facebook at www.facebook.com/USFunds. You can also watch exclusive videos on what research overseas has turned up on the U.S. Global YouTube channel at www.youtube.com/USFunds.

US Global Investors, Inc. is an investment management firm specializing in gold, natural resources, emerging markets and global infrastructure opportunities around the world. The company, headquartered in San Antonio, Texas, manages 13 no-load mutual funds in the U.S. Global Investors fund family, as well as funds for international clients.